Is BNPL a smart choice or a dangerous debt trap? Explore the risks and rewards | Mint
Source: Live Mint
The emergence of Buy Now, Pay Later (BNPL) services has completely transformed our purchasing habits. BNPL has become a very attractive alternative to conventional credit cards by offering interest-free payments and instant gratification. While it allows for flexibility and ease for temporary transactions, misuse of this payment option can seriously jeopardise your financial stability.
What is BNPL?
Instead of paying it all at once, you can now buy now and pay later with BNPL. This means that the business will pay for the purchases you made through BNPL providers on your behalf. Then, you would have a certain period to pay back the loan in instalments.
How does BNPL work?
Although each supplier has different terms and conditions, the process is more or less the same for all:
- Buy from a partner retailer.
- Choose “Buy Now, Pay Later” at checkout.
- Pay a small amount initially.
- Over the agreed term, pay the balance in interest-free instalments.
Benefits of BNPL
BNPL services are attractive because they offer the following benefits:
Drawbacks of BNPL
Despite all these benefits, BNPL has many significant risks associated with it as well:
- High interest rates: Interest rates for a longer-term payment plan or when late payments are made can be much higher than those on typical credit cards or loans.
- No savings growth: BNPL may seem to provide affordability, which can promote impulsive spending and hinder long-term financial goals.
- Debt overload: Easy spending can lead to over-spending and piling up of unbearable debt.
What is the impact of BNPL on your credit score?
BNPL may both positively and negatively affect your credit score:
In conclusion, when applied correctly, the BNPL trend can be an excellent tool for cash flow management and is undoubtedly easy. However, there are dangers that go along with it, including over-spending, building debt, and even ruining credit scores.
(Note: Using a credit card carries its own set of risks)
